What does leasing mean?
What does leasing mean? The word lease has been around for quite some time and in different contexts. The term ‘leasehold’ has been around for centuries, dating back to the Middle Ages.
You may have also heard of car leasing, which could be why you’re reading this article today. Car leasing has been popular in the United States for some time now, and has become popular with businesses in the UK since around the 1990s. However, it’s the rise of personal leasing that has caught people’s attention, as leasing is now one of the most popular ways of getting a new car.
But, what does leasing mean? And what does it mean in the context of vehicles?
In this article, we are going to look at what leasing means, a brief history of vehicle leasing, and whether car leasing is right for you.
What does leasing mean?
The Cambridge English Dictionary defines leasing, in general, as;
A financial arrangement in which a person, company etc. pays to use land, a vehicle, etc. for a particular period of time.
In the context of car leasing, this means that someone, either a private individual or a business, pays to drive a vehicle for a set period of time (usually between 1-5 years) while paying a fixed monthly fee. When that time is up, the private individual or business hands the vehicle back with nothing more to pay.
You are essentially renting the vehicle, as you never own it.
When did car leasing start?
As we mentioned, the idea of a leasehold when talking about property appeared a few decades ago after the Doomsday Book when the concept of leasing was established to allow ‘surfs’ to work a plot of land for a fixed period of time, paying ‘in-kind’ with food and services. The concept of a Leasehold as we know it today came about in the 1920s and increased in use in the 1950s.But anyway, we aren’t talking about property, we’re talking about cars. Interestingly, car leasing has been around for longer than you think. The first record of leasing started in the 1700s in the United States. Back then, it was horses and buggies that were leased. It was then railcars and locomotives that were leased under equipment trust certificates.
Car rentals have origins dating back to 1918 when Walter Jacobs had a 12 Model-T Ford and a Rent-A-Car business (which was later sold to a man called John D. Hertz). Leasing didn’t really take off until the 1940s for both businesses and individuals. Short term rentals became increasingly popular, and before we know it airports are full of the likes of Hertz, Avis and National Car Rental. Ford brought Personal Contract Hire over to the UK in the early 90’s, but it didn’t take off as well as they would have hoped. They did, however, plant the seed and soon enough vehicle brokers appeared and the demand for leasing increased. At this time, banks were only interested in the businesses that wanted big fleets but as it grew in popularity, so did the interest from private individuals. Fast forward a decade and a bit and leasing for both businesses and private individuals are at an all-time high.So that’s a bit about car leasing and its history, you can read more about the history of car leasing and the affect it has had on the automotive industry here.
How does leasing work?
Okay, so how does car leasing actually work?
When you want to lease a car, you will either go through an online leasing company, head to a dealership or contact a vehicle broker. You will decide which contract you want and which car you want to lease and they will find a deal that best suits your situation. When you lease a car, you agree to a pre-agreed mileage. If you go over your mileage allowance, then you will be subject to extra fees. You can read more about excess mileage charges here.You are also contractually obliged to keep the vehicle in a good condition. We’re sure that you will, of course, but you will have to keep it in a condition that is in line with the BVRLA Fair Wear and Tear Guide. This is the industry standard for the condition of all lease cars on their return. You can read more about the BVRLA Fair Wear and Tear Guide here.
You will have the car for a set period of time, then when the time is up, you hand the car back. Your vehicle will undergo an inspection where the mileage and the condition of the vehicle will be checked. You can read more about what happens when your car is returned here. That’s pretty much it with a lease vehicle. You don’t have to worry about reselling or disposing of the vehicle, that is all done for you by the finance house.
What lease options do I have?
There are two leasing options that are available to you; Contract Hire and Contract Purchase.
Contract Hire is where your business (if you are a private individual then you will look at Private Contract Hire which works in the same way) will have a car or a van for a set period of time, paying a monthly fee. When that time is up, the vehicle is returned with nothing more to pay (subject to mileage and condition restrictions). You can read more about Contract Hire here.Contract Purchase works in a similar way in that you pay a fixed monthly fee to have a vehicle for a set period of time. However, when that time is up, you have three options;
- Purchase the car for a pre-agreed value
o This is called the Minimum Guaranteed Future Value and is agreed at the beginning of the contract. This doesn’t change for the duration of the contract.
- Hand the car back with nothing more to pay
o You will be subject to mileage and condition restrictions the same as a Contract Hire
- Part-exchange the vehicle
So there is a degree of flexibility when it comes to a Contract Purchase.
What are the advantages and disadvantages of leasing a car?
There are lots of advantages to leasing a car, which is why it is so popular. These include;
- The fact that you get a new car every few years
o When you lease a car, you hand the car back and get a brand new one
o Leases aren’t often available on used cars which means your lease car will be safer, more reliable, more economical and more technologically advanced than most.
- It’s a great incentive for employees
o If you are looking at leasing for your business, then a company car is a great incentive for employees It’s also been proven that it attracts the best employees.
- The monthly payments are fixed
o This makes for easy budgeting
- You don’t have to worry about depreciation
o This is because you are not the one selling the vehicle on, so you don’t have to worry about losing money or disposing of the vehicle
- You can often drive a nicer car for less money
o This is because you do not pay the full amount for the car, you simply pay for how much it is going to depreciate. This means that leasing is often cheaper than getting a car on a purchase agreement. This then means that you can drive a nicer car for less money than you might have thought.However, there are disadvantages which means it is not right for everyone. These include;
- The fact you don’t own the car
o This is subjective, but if you like the thought of definitely owning your vehicle at the end, then leasing is not the best option for you
- You are subject to mileage and condition restrictions
o Even if you have a Contract Purchase you will still have these restrictions in case you decide to hand the car back at the end
- If you have bad credit, then it can be more difficult to lease a car
o This is because the finance house needs to know that you are going to be able to make the monthly payments and to determine this they look at your credit score.
o It’s not impossible, but it does make leasing more difficult
- You have to get the car serviced throughout
o It is in your contract that you have to get your lease vehicle serviced throughout the duration of the contract, which is an additional cost that you have to think about.
o You can stagger the cost by getting a maintenance agreement. You can read more about maintenance agreements here.
Who can lease a car?
Pretty much anyone can lease a car, whether you are a business or a private individual. As long as you have a strong credit score, you are able to make the monthly payments and are confident you will see the contract to the end, then there is no reason why you shouldn’t be able to lease a car.We have touched upon leasing with bad credit above, and it isn’t impossible to lease a car if you have a weak credit score. However, it will be more difficult and it could be more expensive. The key to leasing with bad credit is that you need to find a vehicle broker (most dealerships do not deal with bad credit leasing) who is established and has the experience and the contacts to get you the best deal for your situation. You can read more about what to look for in a vehicle broker here.
You also need to be prepared to see your contract to the end, as lease contracts are not designed to be cancelled halfway through. It is complicated and you could end up paying a hefty fee. You can read more about what happens should you decide to cancel your lease contract here.
Is leasing right for me?
After all that, is leasing right for you? If you like the idea of driving a brand new car every few years and paying lower monthly payments than you would if you were to buy it, then leasing is great for you. It is also a great option if you don’t want to have to worry about depreciation or disposing of the vehicle.
It is a perfect option for businesses who want a great incentive for employees all the while avoiding having their cash tied up in a depreciating asset. You can read more about the business benefits of leasing here.In conclusion, leasing is where you pay a fee for something, either land or a vehicle, for a set period of time but you do not own it. When you lease a vehicle, you will drive that vehicle for a set period of time and when that time is up, you hand the car back. The concept of leasing has been around for a while, but car leasing has only really become popular in the UK since the 1990s. Personal leasing is on the rise, and with the advantages we have mentioned above, it’s easy to see why. Hopefully this has cleared a few things up on what leasing means, and whether it is right for you.